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  • Writer's pictureAmi Kassar

AmiSight 2/23: The Grass Is Not Always Greener on the Other Side – Private Equity Challenges

Private equity companies are facing challenges these days, which were discussed in a recent Wall Street Journal article

 

The article discusses how, in 2023, private equity firms faced challenges and refrained from significant dealmaking due to high interest rates, challenging market conditions, and investor pullbacks. Private equity deal activity globally dropped by around 40% to $846 billion in 2023, compared to $1.44 trillion in 2022. The decline in leveraged buyouts, a signature of private equity firms, was approximately 25% globally.

 

Elevated interest rates hindered access to cheap debt, prompting firms to use pricier credit sources or invest more equity, impacting potential profits. Locking in profits from existing investments also became challenging, with exit activity at its second-lowest point in the last decade in the U.S. during the third quarter of 2023. IPOs were largely shelved, and the money returned to pension funds decreased significantly, causing investors to cut back on contributions. Limited partners, frustrated with the lack of new deals, questioned management fees and profit cuts.


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